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If you are interested in incorporating as a C corporation, these frequently asked questions provide an overview of the incorporation process, the types of corporations, and how a C corp compares to an LLC or an S corp.
What is a C corporation?Does a corporation have “perpetual existence”?Who Should Form a Corporation?Who can be a shareholder in a C corp?Which is the best state for forming a C corp?What legal documents are required to form a C corporation?Do I need a registered agent for my C corporation?Do I need an attorney to incorporate as a C corp?What happens after incorporation?What is a “close corporation”?What is a “personal service corporation”?What is the difference between a C Corp and an LLC?What is the difference between a C corp and an S corp?Can I change my current LLC or S corporation to a C corporation?How do I change the name of my C corporation?
A C corporation, sometimes called a “regular” corporation or just a “corporation” is a separate legal entity under state law. This means that a corporation can buy and sell property, hire employees and enter into contracts on its own behalf. The assets of the owners, called stockholders or shareholders, are protected from the debts of the business.
Yes, one characteristic of a corporation is “unlimited duration” or “perpetual existence” This is one advantage of a corporation over a partnership or a sole proprietorship: a corporation has a life of its own. If a sole proprietor or a general partner dies, then the business or partnership ceases to exist. This is not the case with C corporation. The ownership can change hands and the corporation will continue. Of course, the incorporators can opt for a limited period of duration, but this is rarely done.
Every business owner should consider operating the business in a manner that shields the owner’s personal assets from the liabilities, debts and judgments of the business. A C corporation provides this shield. While an LLC provides this shield, business owners who intend to have a large number of owners or to attract venture capital may prefer to operate as a corporation.
Any entity, including individuals, corporations or LLCs, can be a shareholder in a C corporation. However, it the incorporators plan to make an S corporation election, there will be restrictions on who can be a shareholder and the number of shareholders a corporation can have. See our article, “S Corporation FAQs” for more information on these limitations.
There is no one “best state” to form a corporation. The best state to incorporate your business depends upon your reasons for forming your business and your expansion plans. In general, most small businesses incorporate where the owners live or where the company is doing business in order to reduce initial and on-going costs and compliance responsibilities. Some companies that have plans for expanding into multiple states, seeking venture capital, or going public will opt to incorporate in a “business friendly” state, such as Delaware or Nevada.
If you incorporate in a state other than the one where you are doing business, you will need to apply for a certificate of authority immediately in order to operate in the other state (also known as "Foreign Qualification"). And, going forward, you will have to file annual reports (and pay the annual report filing fees) in both the formation state and in each state where you are registered to do business.
The first step in creating a C corporation is to incorporate by filing Articles of Incorporation with the state selected as the formation state. The Articles of Incorporation contain basic information about the company, such as its name, principal address and the name and address of its registered agent. Most also ask for the names and addresses of the incorporators. In addition, most states require information regarding the number and types of shares that will be authorized, including whether those shares will have a par value.
Yes, you must appoint a registered agent for your C corporation. The initial registered agent is appointed on the Articles of Incorporation. Plus, if you do business in any states other than your formation state, you will need to appoint a registered agent in each of those states. And, you must maintain a registered agent in each state until you dissolve the company or withdraw from the state.
No, you do not need an attorney to incorporate your business You can file the paperwork yourself or you can use a professional business formation service, such as CT. However, you may wish to obtain legal advice regarding the ownership and management structures prior to incorporating as there are business and tax consequences that flow from various choices.
Once the state issues a certificate of incorporation, the company must hold a series of meetings, such as the first directors meeting, and take actions, such as issuing stock, in order for the corporation to be a fully functioning, independent entity and to ensure the shareholders have limited liability protection. Annual meeting and reporting requirements must be met until the corporation is dissolved.
Some states allow for a corporation that is owned by only a few shareholders (usually not more than 35) to dispense with many of the corporate formalities, such as having a board of directors. These corporations are managed directly by the shareholders and there are far fewer meeting and notice requirements. Not every state permits this informal type of management. In states that do (such as Delaware and Nevada) the election to be a close corporation is made on the Articles of Incorporation.
Operating as a close corporation affects the management structure and state-mandated meeting, notice and recordkeeping requirements, it does not have any impact on the taxation of the corporation. It is still considered a separate taxable entity, not a pass-through entity such as an S corporation.
In many states, professionals, such as attorneys, architects, doctors, and accountants, cannot form a regular corporation. Instead, they must incorporate as a personal service corporation (PSC). (Some states identify these corporations as Professional Service Corporations.) Only professionals can own shares and the corporation can only provide one form of service. For example, a professional corporation of lawyers can provide legal services, but not accounting services. Most states require the corporate name to indicate it is a professional corporation.
The major differences are in the areas of compliance responsibilities and taxation. Most states impose far fewer recordkeeping and formal meeting requirements on an LLC than they do on a corporation. Corporations generally are required to hold annual shareholder and directors meetings—in contrast, an LLC’s meeting obligations are determined by the members in the LLC’s operating agreement. Also, the management structure of the corporation is determined by state law; whereas, LLC’s is determined by its members. Finally, many states impose more recordkeeping and document inspection requirements on corporations than they do on LLCs.
With respect to taxation, an LLC is considered “pass-through” tax entity unless the members elect to be treated as a corporation. Absent that election, the LLC does not pay any tax on its taxable income. Instead, the income, losses and tax items (such as depreciation deductions) are passed through to the members or shareholders, who report these items on their personal tax returns.
One significant difference is that all of the LLC’s profits are considered the self-employment income of the members and the members are liable for self-employment tax on their shares. In contrast, a C corporation can pay a salary to the owners who operate the business and pay the reminder of the profits to them as dividends. This greatly reduces the amount of employment tax liability and can result in substantial savings.
Another difference between a corporation and LLC is that the LLC members decide how to allocate profits, losses and tax items among themselves. A corporation must allocate these items based strictly on the number of shares owned.
A C corporation is a separate tax-paying entity, unlike an S corporation. A C corporation reports its own income, expenses, losses and tax items on its own return and pays taxes based on the corporate tax rate. Any money that a shareholder receives is distributed as salary or dividends. Profits distributed as dividends are actually taxed twice: once as corporate income on the corporation's tax return and, again, as income on the shareholder's tax return. In contrast, income from an S corporation is passed through and reported on the shareholder’s returns, without being subject to tax at the corporate level.
However, there are tax planning strategies—such as accumulating earnings—that are not available to an LLC or an S corporation that may offset concerns regarding “double taxation of dividends.” Talking with a tax advisor can help you sort through the options and determine what is best for your circumstances.
Yes, most states permit the conversion from one form of business to another. CT’s business specialists can walk you through the process—which varies based on your current form of business, your formation state and the other states where you are registered to do business.
You can change the legal name of your corporation by filing a Certificate of Name Amendment with your state of formation. (You will need to file a similar certificate in every state where you are currently authorized to do business.) Another option—and one that might not involve filing in multiple states—is to file a “doing business as” (DBA) certificate in the state where you wish to use a different name.
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